Ador Welding Ltd

December 18, 2015

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Sector
CMP (Rs)
FY17E Target Price (Rs)
Volumes (BSE+NSE)*
Shares (mn)
Market Cap (Rs mn)
52 Week H/L (Rs)
Free Float (%)
Bloomberg Code
Reuters Code

Industrial Goods
333
389
14600
13.6
4529
352/185
43.3
AWL IN
ADOR.BO

Accumulate

Banking on domestic demand revival

We recently interacted with the management of Ador Welding Ltd
(AWL) to understand its business and the way forward for the
company. With domestic demand revival, we expect AWL to report
12.1% CAGR in its revenues over FY15-17E, while PAT will
witness a CAGR of 5.3% over the same period. EBITDA margin is
expected to expand by 450 bps to 12% in FY17E from 7.5% in
FY15. We remain positive on AWLs future growth prospects.

*Three month average

Demand revival to drive volume growth in consumables

Share Holding Pattern (30/09/2015)

Particulars

Shares
(mn)

Holding
(%)

7.7
0.0
2.2
3.7
13.6

56.7
0.0
16.2
27.1
100.0

Promoters
FIIs
DIIs
Others
Total
Source : BSE

Financial Highlights
(Rs Mn)
Sales
Sales Growth
EBITDA Margin
PAT
EPS (Rs)
P/E (x)
EV/EBITDA (x)
ROE

FY15
3,861
4.0%
7.5%
319
23.4
14.2
15.0
15.7%

FY16E
4,225
9.4%
11.0%
270
19.9
16.8
9.1
12.9%

FY17E
4,853
14.9%
12.0%
353
26.0
12.8
7.2
16.0%

In India the welding consumables market is expected to exhibit a CAGR of

5.6% from 2014 to 2020. With gradual recovery expected in the IIP Index,
the demand for industrial products will also improve, which in turn would
help AWL to clock 7.5% CAGR growth in consumables over FY15-17E.

Change in revenue mix towards projects will aid margins

Over the last few years equipment and project segments (which has a
higher margin than consumables) share in AWLs revenue mix has steadily
increased from 23% in FY12 to 30% in FY15. Going forward we expect
AWLs equipment and project segment revenues to contribute as much as
35.3% to its consolidated revenue in FY17E.

Zero debt, clean balance sheet, consistent dividend payout

AWL has one of the cleanest balance sheets apart from being a debt free
company. The current cash balance of AWL at the end of FY15 stands at
Rs 198mn, which is expected to increase to Rs 330mn by FY17E. Going
forward with improving EBITDA margins and profitability, we expect AWLs
dividend yield to reach 3.3% in FY17E from 1.8% in FY15.

Source : Company Data, QS Research

Steady improvement in EBITDA margin and return ratios

We expect consolidated EBITDA margins for AWL to expand from 7.5% in
FY15 to 11% in FY16E (10.3% in H1FY16) and 12% in FY17E. This will in
turn help AWL to improve its return ratios. We expect AWLs ROCE to
increase from 7.8% in FY15 to 15.5% in FY16E and 19.7% in FY17E, while
ROE will improve from 9.3% in FY13 to 12.9% in FY16E and 16% in FY17E

Price Chart

AdorWelding 2YearPriceChart
322
222

Analyst: Monami Manna

+91- 22- 40287020
monami@qsmail.com

Oct15

Jun15

Aug15

Apr15

Feb15

Oct14

Dec14

Jun14

Aug14

Apr14

Feb14

Dec13

122

Outlook and Valuations

We remain positive on AWL from a longer term perspective and expect the
financial performance of the company to improve in the next 2-3 years
with revival in the capex cycle of the Indian economy. At CMP of Rs 333,
AWL trades at a P/E of 12.8x FY17E EPS of Rs 26. Giving a target P/E
multiple of 15x to its FY17E EPS of Rs 26, we arrive at a target price of
Rs 389 for the stock, which gives an upside potential of 16.8%. We assign
an Accumulate rating on AWL with a medium to longer term view.

Quantum Securities
Company Background
Ador Welding Ltd (AWL), incorporated in the year 1951, is one of Indias leading players in the field of Welding
Products Technologies & Services. AWL offers comprehensive welding solutions, which includes a wide variety
of electrodes, fluxes, flux-cored wires and special customized electrodes. The Company covers the need of a
whole range of industries like, steel, petro-chemicals, fertilizer, hydro-electric, thermal & nuclear power, heave
machinery, ship-building etc. AWL has reach in 70 plus countries and a comprehensive distribution network
across the country with 300 plus distributors.

Business Segments
AWL operates in two business segments; 1) Welding Consumables and 2) Welding Equipment and Project. In
the organized segment of the Indian welding industry, AWL has ~13% market share in welding consumables
and ~23% market share in welding equipment. The Company has four manufacturing plants across India, out
of which three (Raipur, Silvassa, Chennai) are for consumables and the fourth one at Chinchwad in Pune caters
to AWLs equipment and project engineering business.

BusinesssegmentsofAdorWelding

WeldingEquipmentandProject

WeldingConsumables

Plantlocation:Chinchwad,Pune
Marketshare:23%
Revenuecontribution:30%(FY15)

Totalcapacity:1,05,000MT
SilvassaPlant:35000MT
RaipurPlant:35000MT
ChennaiPlant:35000MT(currentlysuspended)
Marketshare:13%
Revenuecontribution:70%(FY15)

WeldingEquipment

Revenuecontribution:80%

Project

Revenuecontribution:20%

Source: Company, QS Research

Welding Consumables
This segment is into manufacturing of welding consumables (both manual and continuous) which include
electrodes, fluxes, flux cored wires and special customized electrodes. At present The total installed capacity of
welding consumables stands at 1,05,000MT spread across its three plants at Silvassa, Raipur and Chennai.
Due to industrial slowdown in last few years its Silvassa and Raipur plants are operating at 50% capacity
utilization, while the operation at its Chennai plant is currently suspended (from May 2014).
Welding Equipment and Project
This segment includes Equipments, Spares, Cutting Products and agency items related to Equipment and
cutting products. Apart from the welding equipment, this segment also has a Project Engineering Division
(PED) which undertakes Engineering, Procurement and commissioning of flares, incinerators, furnaces, etc.

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Quantum Securities
Domestic growth driver : Demand revival to drive volume growth in consumables
The welding industry in India has been expanding due to growth in end-use industries such as automobile &
transportation, and building & construction. The welding consumables market accounts for a significant share
in the welding industry compared to welding equipment and welding services. In India the welding
consumables market is expected to exhibit a CAGR of 5.6% from 2014 to 2020. The markets value as
recorded in 2013 was Rs 30.8bn. The overall value of the India welding consumables market is expected to
reach Rs 45.3bn by the end of 2020. The domestic welding consumables industry is moderately fragmented
with 40% being shared by hundreds of unorganized (small & regional) manufacturers while the balance 60%
is accounted by the organized players like AWL, ESAB etc. Currently AWLs share in the organized market for
consumables stands at ~13% while ESAB has a market share of ~23%.
Market share of various players in welding consumables

Unorganised,
40%

ESAB,23%

Organised,
60%

Others,24%
AWL,13%

Source: Company, QS Research

Welding consumables & equipment caters to the need of a whole range of industries such as steel,
petrochemicals, fertilizers, hydro electric and thermal power, nuclear power, ship building, heavy machinery,
defense, automobile, general fabrication and engineering. The growth in these sectors is merely the reflection
of how the Index of Industrial Production (IIP) shapes up in the economy. With gradual recovery expected in
the IIP index over FY15-17E, the demand for industrial products will also improve. This demand revival will in
turn drive the volume growth of consumables for AWL. In our model we have factored in a 7.5% CAGR growth
in welding consumable segment for AWL over FY15-17E.
Welding Consumable Segment Revenue Growth Trend
30%
3600
3000
15%
2400
1800
0%

1200
600
0

-15%
FY13

FY14

FY15

Revenue (Rs Mn)

FY16E

FY17E

Growth (%)

Source: Company, QS Research

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Quantum Securities
Change in revenue mix towards more of equipment and projects will aid margins
The welding consumables segment currently contributes 70% (FY15) of the total revenues whereas rest 30%
is accounted for by the equipment and project engineering division. Further in the latter segment, 80% of the
revenues are being contributed by the welding equipment while the balance comes from the Project
Engineering Division (PED). Over the last few years equipment and project segments share in AWLs revenue
mix has steadily increased from 23% in FY12 to 30% in FY15. Going forward we expect AWLs equipment and
project segment revenues to contribute as much as 35.3% to its consolidated revenue in FY17E.
AWLs revenue mix over the years

3,139

1,714

2,854

1,371

2,718

959
2,756

781

2,822

1,000

2,628

2,000

2,234 718

3,000

828

4,000

1,143

5,000

FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

0
Consumables

Equipment&Projects

Source: Company, QS Research

As the equipment and project segment offers better margins compared to consumables, AWLs EBITDA margin
is expected to witness decent expansion going forward with higher share of equipment business. In our model
we have factored in a 450bps expansion in AWLs consolidated EBITDA margin over FY15-17E.
AWLs EBITDA Margin Trend
20%

15.8%

15%

11.1%

10%

11.0%

9.3%

7.2%

12.0%

7.5%

5%
0%
FY11

FY12

FY13

FY14

FY15

FY16E

FY17E

EBITDA Margin (%)

Source: Company, QS Research

Capacity utilization to improve going forward

At present The toal installed capacity of welding consumables stands at 1,05,000MT spread across its three
plants at Silvassa, Raipur and Chennai. Due to industrial slowdown in last few years its Silvassa and Raipur
plants are operating at 50% capacity utilization, while the operation at its Chennai plant is currently suspended
(from May 2014). With gradual recovery expected in the IIP index over FY15-17E, the demand for industrial
products will also improve. This demand revival will in turn help AWL to improve its capacity utilization going
forward which will in turn drive the volume growth of consumables for AWL.

Ador Welding Visit Note

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Quantum Securities
Zero debt company with clean balance sheet and consistent dividend payout
AWL has one of the cleanest Balance Sheets apart from being a debt free company. The current cash balance
of AWL at the end of FY15 stands at Rs 198mn, which is expected to increase to Rs 330mn by FY17E. Further
AWL has a track record of paying dividend for more than 12 years with the current dividend yield placed at
1.8%. Going forward with improving EBITDA margins and profitability, we expect AWLs dividend yield to reach
3.3% in FY17E from 1.8% in FY15.
AWLs Dividend Yield over the years

AWLs Cash Balance over the years (Rs Mn)

400

4%
3%

3.3%
2.2%

2%

3.3%

1.8%

330
282

300
217

198

200

1.8%

1%

100

47

0%
FY13

FY14

FY15

FY16E

FY17E

FY13

Source: Company, QS Research

FY14

FY15

FY16E

FY17E

Source: Company, QS Research

Steady improvement in EBITDA margin and return ratios

With gradual demand revival in the industrial space, AWL's capacity utilization is set to improve going forward,
which will in turn help the Company to grow its welding consumable volumes. Also AWLs focus on improving
its product mix towards higher margin equipment and project business will help improve its operating margins.
AWL has already improved its EBITDA margin to 10.3% in H1FY16 from 7.5% in FY15. Going we expect
consolidated EBITDA margins for AWL to improve from 7.5% in FY15 to 11% in FY16E and further to 12% in
FY17E respectively. This will in turn help the company to improve its return ratios. AWL reported 11.3% ROCE
in FY13, which subsequently came down to 7.8% in FY15. With higher capacity utilization, expansion in
EBITDA margin and improved profitability, we expect AWLs ROCE to improve from 7.8% in FY15 to 15.5% in
FY16E and 19.7% in FY17E. ROE will also improve from 9.3% in FY13 to 12.9% in FY16E and 16% in FY17E.
AWLs EBITDA Margin Trend over the years

AWLs Return Ratios over the years

20%

25%

15.8%

20%

15%

11.1%
10%

15%

11.0%
12.0%

7.2%
9.3%

7.5%

5%

15.7%

FY11

FY12

FY13

FY14

FY15 FY16E FY17E

Source: Company, QS Research

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12.9%

9.3%

16.0%

20%
10%
5%

7.8%

0%

0%
3.0%

5%

10%

10%
FY13

EBITDA Margin (%)

25%
15%

7.8%

5%

0%

15.5%

11.3%

10%
5%

19.7%

FY14

FY15

ROE

FY16E

FY17E

ROCE

Source: Company, QS Research

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Quantum Securities
Outlook
Ador Welding Limited (AWL), one of the leading players in the welding consumables & equipment space, is well
placed to benefit from the expected pick-up in the domestic investment cycle, especially in the core
infrastructure space resulting in improved demand for its welding products. In India the welding consumables
market is expected to exhibit a CAGR of 5.6% from 2014 to 2020. With gradual recovery expected in the IIP
Index, the demand for industrial products will also improve, which in turn would help AWL to clock 7.5% CAGR
growth in consumables over FY15-17E. With improving capacity utilization of welding consumables and rising
share of higher margin equipment and project business in its revenue mix (35% in FY17E against 30% in
FY15), AWLs consolidated EBITDA margin is expected to witness 450bps expansion in over FY15-17E. With
higher capacity utilization and expansion in EBITDA margin, we expect AWLs PAT to witness a CAGR of 5.3%
over FY15-17E, while revenue will witness a CAGR of 12.1% over the same period.

Valuations
At CMP of Rs 333, AWL trades at a P/E of 12.8x FY17E EPS of Rs 26. AWL reported 11.3% ROCE in FY13,
which subsequently came down to 7.8% in FY15. With higher capacity utilization, expansion in EBITDA margin
and improved profitability, we expect AWLs ROCE to improve from 7.8% in FY15 to 15.5% in FY16E and
19.7% in FY17E. ROE will also improve from 9.3% in FY13 to 12.9% in FY16E and 16% in FY17E respectively.
This will in turn drive the re-rating of the stock. We remain positive on Ador Welding (AWL) from a longer term
perspective and expect the financial performance of the company to improve substantially in the next 2-3
years, with revival in the capex cycle of the Indian economy. Giving a target P/E multiple of 15x to its FY17E
EPS of Rs 26, we arrive at a target price of Rs 389 for the stock, which gives an upside potential of 16.8%. We
assign an Accumulate rating on AWL with a medium to longer term view.

Ador Welding Visit Note

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Quantum Securities
Income Statement (consolidated)
(Y/E March) (Rs mn)

FY13

FY14

FY15

FY16E

FY17E

Net sales

3,650

3,713

3,861

4,225

4,853

Raw material cost

2,377

2,456

2,650

2,915

3,397

375

398

370

414

485

Employee cost
Other expenses

558

591

552

431

388

3,310

3,445

3,571

3,760

4,271

EBITDA

340

268

289

465

583

Depreciation

124

123

125

125

132

EBIT

216

145

164

340

451

Interest

10

21

12

Other income

38

50

44

46

53

245

174

196

386

504

130

-282

245

44

478

386

504

76

95

159

116

151

169

-51

319

270

353

169

-51

319

270

353

FY13

FY14

FY15

FY16E

FY17E

136

136

136

136

136

Reserves

1,687

1,549

1,889

1,967

2,070

Net worth

1,823

1,685

2,025

2,103

2,206

90

173

86

86

86

1,917

1,863

2,113

2,189

2,292

Gross block

2,236

2,294

2,313

2,438

2,538

Less: Acc. depreciation

1,422

1,521

1,340

1,464

1,596

815

774

974

974

942

18

16

16

16

271

138

65

65

65

572

927

1,050

1,135

1,270

1,917

1,863

2,113

2,189

2,292

Total expenses

PBT
Extraordinary
PBT after Extraordinary
Tax
PAT
MI & Associates
PAT after MI & Associates

Balance Sheet (consolidated)

(Y/E March) (Rs mn)
Equity capital

Total borrowings
Deferred tax liabilities
Capital Employed

Net block
CWIP
Investments
Deferred tax assets
Net current assets
Total Assets

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Quantum Securities
Cash Flow Statement (consolidated)
(Y/E March) (Rs mn)

FY13

FY14

FY15

FY16E

FY17E

PBT

245

44

478

386

504

Depreciation

124

123

125

125

132

(8)

(29)

(32)

(46)

(53)

361

138

571

465

583

(142)

(49)

(266)

(44)

(211)

Operating CF after WC changes

219

89

305

421

372

Less: Taxes

(73)

(89)

(52)

(116)

(151)

Operating cash flow

145

(1)

253

305

220

(Inc)/dec in FA+CWIP

(141)

176

(18)

(117)

(100)

101

134

73

(40)

310

55

(117)

(100)

(71)

235

180

120

(8)

83

(171)

(2)

Equity raised

Interest & others

(143)

(73)

45

77

(95)

(80)

(82)

(149)

(149)

(97)

(140)

(327)

(105)

(72)

Net inc/(dec) in cash

170

(19)

83

48

Opening balance of cash

38

47

217

198

282

Closing balance of cash

47

217

198

282

330

Interest & others

Cash flow before WC changes
(Inc)/Dec in WC

(Purchase)/sale of investments
Cash flow from investing
Free cash flow (FCF)
Loan raised/(repaid)

Dividend
CF from financing activity

Ador Welding Visit Note

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Quantum Securities
Key Ratios (consolidated)
(Y/E March) (Rs mn)

FY13

FY14

FY15

FY16E

FY17E

7.1%

1.7%

4.0%

9.4%

14.9%

EBITDA

-10.4%

-21.3%

8.1%

60.6%

25.4%

PAT

-19.2%

-130.3%

523.5%

-15.2%

30.6%

EBITDA

9.3%

7.2%

7.5%

11.0%

12.0%

PAT

4.6%

-1.4%

8.3%

6.4%

7.3%

12.4

-3.8

23.4

19.9

26.0

134.0

123.9

148.9

154.7

162.2

P/E (x)

26.8

-88.6

14.2

16.8

12.8

EV/EBITDA (x)

13.4

16.8

15.0

9.1

7.2

2.5

2.7

2.2

2.2

2.1

11.3%

7.8%

7.8%

15.5%

19.7%

9.3%

-3.0%

15.7%

12.9%

16.0%

Growth (YoY)
Sales

Margins

Per Share Ratios (Rs)

EPS
Book value
Valuation Ratios

P/B (x)
Return Ratios
ROCE
ROE

Disclaimer: Quantum Securities Pvt. Ltd. (QSPL) offers discount and full service brokerage services and is not involved in any investment banking or
merchant banking activities. This document is based on information obtained from sources believed to be reliable and due diligence has been conducted to
that effect. We do not have any other material conflict of interest at the time of publication of the research report. Opinions & theories expressed are based on
present circumstances & judgment and are subject to change without notice. Quantum Securities Pvt. Ltd. accepts no liability whatsoever for any direct or
consequential loss arising from any use of this document or further communication given in relation to this document.
If annualized returns are greater than 15%, then the stock is rated as BUY, between a range of 10-15% is rated as Accumulate. If annualized returns are
lower than -15%, then the stock is rated as SELL and between a range of -10% to -15% is rated as Reduce. In the range of +/ (-) 10%, the stock is rated as
Hold. However, within this zone we may choose to give an Accumulate, Reduce or Hold rating.
Quantum Securities Pvt. Ltd. does not have any financial interest in the subject company and has not been engaged in market making activity for the subject
company; QSPL or any of its associates have not received any compensation or other benefits from the subject company or third party in connection with the
research report or any other compensation from the subject company in the past twelve months. Further, Monami Manna has not served as an officer, director
or employee of the subject company; QSPL does not have actual/beneficial ownership of one per cent or more of securities of the subject company, at the end
of the month immediately preceding the date of publication of the research report.

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